Tencent (the most powerful company in China) Final Part.

Tencent’s plans for company domination

 

Pony Ma once called a meeting of Tencent’s top managers, and highest-ranking employees, to plot out Tencent’s strategy. The meeting has since been dubbed The Conference of the gods since it was essentially a meeting of minds that would plot out Tencent’s plans for domination, and the decisions made in that meeting would have serious ramifications for not just China, but the rest of the world.

 

The main purpose of the meeting had been to establish what Tencent’s core competitive advantages were, and how those could be exploited. The answer was fairly simple: Tencent’s advantages were that they have huge amounts of traffic and money. Far more than any competition. And thus the plan became:

 

Step 1. Attract other businesses to launch their own mini-programs via WeChat, so they could leverage some of WeChat’s traffic.

 

Step 2. Tencent would then invest money into the businesses that were doing the best since Tencent’s had all the data on which mini-programs people were using, how often, and how much money they were spending.

 

Step 3. After investing in certain businesses, Tencent could then artificially give more traffic to the companies it invests in, thus making them even more money, which they can also re-invest in even more companies.

 

In other words, Tencent can cherry-pick the best mini-programs, invest in them, boost their popularity, and practically guarantee their investment is a big success. No other company in the world has quite the same level of data on user behavior to see what’s popular, and then the ability significantly increases their value further by promoting them within WeChat. It also creates synergies between Tencent’s investments.

 

For example, Tencent has a significant stake in Didi, which is China’s equivalent of Uber. And through WeChat, Tencent can promote Didi more, thus giving it an unfair advantage and increasing the value of its investment. But not just that, because Didi uses WeChat pay, Tencent also takes transaction fees on every payment. It did the same thing after investing in the China e-commerce company JD - once Tencent owned part of the business, they massively increased JD’s visibility within their apps to drive more sales.

 

Of course, all of this was insanely lucrative for Tencent but then came the next part of the plan: using some of the money it generates from its cash cows in China to invest in companies abroad, thus letting Tencent diversify away from China. This is particularly important for Tencent because if their entire empire is only based in China, they are totally at the mercy of the China government.

 

The Tencent investment outside China

 

So, Tencent has acquired or invested in many hundreds of companies outside of China in all different industries, thus building a huge international portfolio.

For example, Tencent became one of the largest shareholders of Tesla. Tencent’s also bought part of Reddit and Discord. This did prompt some backlash and concerns, as some argue that if Tencent has access to a company's data, so does the CCP and that through Tencent they can subtly influence decisions in these international companies, and thus ultimately influence Western culture.

It sounds extreme, but it’s not unrealistic - just look at the NBA example from earlier where the coach backtracked on his comments and apologized after threats from Tencent and China. But to be fair here, Tencent does mostly seem to stay out of the way of the international companies they invest in, and just take an equity percentage and then not get too involved. Or at least, they haven’t yet. As a result of this hands-off approach though, some accuse Tencent’s of basically abandoning innovation, and now just becoming essentially a gigantic investment fund, funneling money from its apps in China into promising companies in other countries, rather than creating much that’s new or original itself. And they don’t even really try and build their brand that much internationally 

 @Tencent’s on Twitter is actually suspended because someone had been holding the Twitter handle with a bio saying “daddy Tencent’s, come and buy my account” - basically they were expecting Tencent to come and buy the @ Tencent’s Twitter handle off them.

But Tencent didn’t bother. Building their brand internationally isn’t a big priority for them, they’re happy to just quietly invest abroad. Now, one of their most lucrative investments has been in gaming. The gaming industry is estimated to have generated $176 billion in revenue in 2021, almost five times the box office of the movie industry. And Tencent’s essentially the biggest player in the market. Now of course, even from the relatively early days of Tencent, they’d been experimenting with creating games themselves - especially mobile games. In fact, their game Honor of Kings is so popular in China that there’s a black market where people pay for others to play the game for them to improve their ranking, as just like everything else in China, it is connected to WeChat.

So some people pay better players to improve their game stats as it’s a bit of a social and status symbol. However, most of Tencent’s original games were overly tailored to the China market, often featuring China propaganda to appease the CCP, and so it quickly became clear to Tencent that rather than trying to promote their own games abroad, it made sense to find games with potential and just give them loads of money to help them grow quickly, and take a percentage of their company. As a result, Tencent is invested in the studios that make some of the biggest global titles such as League of Legends, Fortnite, World of Warcraft, Clash of Clans, PlayerUnknown’s Battlegrounds, and the mobile version of Call of Duty.

They also partnered with Roblox to bring their games to the China market. But two of Tencent’s most important investments were buying 100% of Riot Games, and 40% of Epic Games, one of the world’s most valuable start-ups. This not only gave them a stake in some of the most played games on the entire planet but also investment in Epic Games’ Unreal game engine, which has been described as ‘the world’s most advanced real-time 3D creation tool’ and is used for all kinds of different projects.

Whilst Tencent’s investments in international game studios have been extremely lucrative, it’s also brought some unwanted attention to the company. Many fans noticed that after Tencent acquired some of these popular games, there seemed to be more upgrades and unlockable content within the game that required additional payment, and some blamed this on Tencent’s being greedy, as they were clearly pushing for more microtransactions like is the norm in China.

 

League of Legends and Honor of Kings.

 

Another issue arose after acquiring Riot Games, as Tencent’s wanted to turn their most popular title League of Legends into a mobile game to make even more money from it. But the game developers didn’t want to do this - that was never their vision of what the game should be. And since it was their game, they thought that was the end of the discussion.

 

But they later found out Tencent had gone behind their back and made a rip off of their game - which is where Honor of Kings came from. One Riot games employee said that “we were stunned, they were blatantly ripping off our intellectual property”. To add insult to injury, Tencent’s even used notable league of legend players to promote their new game, which caused many people to assume riot games were actively involved with this new game, even though they weren’t.

 

To be fair to Tencent, they were right that a mobile version would be popular: by the end of 2017 Honor of Kings, the league of legends inspired game, was the most popular mobile game in China.

 

It was also in 2017 that Tencent overtook Facebook to become the fifth-largest public company in the world. Their cash cow apps in China were more dominant than ever, and their international investments were paying off massively, thus extending Tencent’s influence all across the planet. And it has to be said that nowadays Tencent’s truly great at finding ways to monetize. For example Tencent’s video platform, essentially their version of Netflix, now inserts extra ads into movies and TV series that weren’t there in the original - such as adding extra billboards and signs in the background.

 

Tencent’s cloud hosting business has also become very profitable - just like Amazon Web Services it started off to host their own services, but then began selling them as a service to others. Plus, as if Tencent weren’t already dominant enough, the outbreak of Covid was actually great for Tencent’s revenue; people were at home on their phones more than ever, which meant using their services and playing their games more. Tencent generated 86 billion dollars in 2021 alone, and 35 billion in net profit, making them one of the most profitable companies.

 

When the unstoppable face trouble.

 

And so you may think that would be the end of the story - that Tencent would be unstoppable. Many shareholders clearly thought so; Tencent’s market cap was approaching 1 trillion US dollars. But in 2020, suddenly Tencent began to face a lot more scrutiny. Quite suddenly Donald Trump began threatening to ban WeChat, and other China apps, because the China Community Party could use them to steal users’ private data, censor anything critical of China and help spread disinformation.

Of course, there were definitely strong political motivations for this attack on China apps and the subsequent executive order to ban them in the US, but even now with the Biden administration there are continued investigations into these China apps and whether they are a national security risk that should be banned.

And thus as one of China’s biggest companies, Tencent was thrust into the international spotlight more than it would like. It may have taken a while, but it seemed people were finally realizing the influence that Tencent’s, and thus China, actually had. Luckily for Tencent, their strategy of taking minority stakes in international companies gave them a lot of protection.

For example, even if the US did want to take action against Tencent, it’s not like they would ban Reddit or Discord just because Tencent had invested a lot of money in them. The only risk was governments banning apps Tencent fully owned and created, like WeChat, but as we know most of their users are in China. So Pony figured this negative media attention in the US wasn’t going to cause too much damage to Tencent’s empire overall. As long as Tencent was on good terms with the China government, things should work out.

 

The worst nightmare became a reality

 

He breathed a sigh of relief, realizing maybe things were going to be ok after all. But then, quite suddenly, Pony’s worst nightmare became a reality. You see, Tencent has faced a lot of business battles - we’ve seen them go to war against China companies like Qihoo, big American companies like Microsoft, and even political battles like with the US government. But there is one enemy Pony Ma most certainly did not want. One enemy that could genuinely destroy them. And that enemy is the China government.

In 2018, rumors of a change in government policy began to spread, and then one day China regulators suddenly stopped approving all new games from being released. The CCP said it felt kids were becoming addicted to video games, and they were also growing concerned about the amount how violent some games were.

One government publication described online games as spiritual opium, and the CCP announced a ban on kids under 18 playing games for more than three hours a week. Tencent’s stock price immediately started to fall. Later that year, Tencent’s profit fell for the first time in over a decade, largely because it couldn’t release or monetize new games due to this new government policy.

To appease the China government, Tencent’s had to make big changes. For example, Tencent introduced facial recognition in their games, and began using police databases to verify the identities of its users and their ages - that way it could ensure people weren’t playing games unsuitable for their age, and also that they weren’t spending too much time playing.

Tencent’s also had to change the nature of some of its games to ensure they aligned with the CCP’s values - for example one of their most popular games, PUBG, previously involved 100 people killing each other until one person is left. But Tencent’s had to change it completely - they rebranded it as Game For Peace, and the story instead became about patriotic warriors. The violence was removed, and blood was replaced with green liquid. When someone gets shot, instead of dying the character simply waves back and disappears. The game was filled with banners of nationalist slogans and patriotic propaganda. Basically, the game was completely censored, and as some users pointed out, turned into a pro-government propaganda machine. Whilst most people didn’t like it, they had no choice.

Tencent realized that despite their huge power and wealth, they were still completely at the mercy of the China government. And then things got much worse. In October 2020 Jack Ma’s company The Ant Group, a gigantic fintech company in China, was preparing for its IPO. It was all approved and ready to go. And then, Jack Ma gave a big speech where he seemed to publicly speak out against the China government; more specifically, he openly criticized China’s traditional finance industry and its regulators. Shortly afterward, The Ant Group IPO was abruptly canceled, supposedly by order of the China president himself. Then, Jack’s other company Alibaba became the subject of an antitrust investigation, with allegations of using anti-competitive monopolistic practices. And then, Jack Ma, a guy who was always happy to take the limelight and do speeches and interviews and high-profile events, just suddenly disappeared.

All of his planned public appearances were canceled, and it seemed he’d been exiled - in fact some questioned if he was even still alive. Now, it’s worth pointing out that Tencent and Alibaba have been rivals for years, directly competing in so many different industries in China as the country’s two most dominant conglomerates.

So when Jack Ma spoke out and faced immediate punishment, Pony Ma must’ve thought he’d won. But little did he know Jack’s actions would be the domino that began Tencent’s downfall as well. It turns out that the China government was not just going after Jack Ma and his companies, but all of China’s big tech giants. In 2021, several other large China tech companies, including Tencent’s, received huge fines for essentially being monopolies. The fines added up to billions of dollars. The CCP had allowed big tech almost free reign for years, but now it was reigning those tech giants back in.

Now to say that Jack’s public criticism of the government was the reason for what happened next is probably not true - that incident was likely just the straw that broke the camel’s back.

In truth, China for a while had been growing concerned about just how powerful some of these companies were becoming. China’s leader often promotes the idea of ‘common prosperity’, and the tech sector had definitely created a large wealth gap in the country. Trying to limit that inequality would definitely be popular with many China citizens. The China government also expressed national security concerns of their own, given all the data these companies like Tencent have - because sure China likes having that data for themselves, but letting any single corporation dominate too much could be a risk for China. So as well as the fines, and some executives being forced to step down, new regulations were introduced to limit the power of some of these tech companies.

Of course, the stock prices of China businesses began to plummet. Its estimated 1.5 trillion dollars of value was wiped off China tech companies' valuations due to the crackdown. Tencent in particular has lost over 500 billion dollars off its market cap, more than half its value, since the crackdown began. And to be honest, many were surprised Tencent was even dragged into this - because, unlike Jack Ma who publicly spoke out, Tencent was known for being extremely cooperative with regulators and the government - they were always compliant with policies and never publicly critical of the CCP. And yet Tencent was definitely targeted.

As well as facing anti-monopoly investigations, and big fines, their new games stopped being approved, and new deals they wanted to make were blocked. And part of the reason may have been that the CCP didn’t think Tencent was actually doing enough to help the state. You see China had got into a difficult position; as a result of sky-high rent costs, its controversial zero-Covid policy, and massively extended lockdowns, many citizens were unhappy, and soon huge protests and riots broke out. And some of this would’ve been organized and word spread through Tencent’s apps like WeChat. Because although Tencent does employ a lot of censors to try and monitor things, controlling the discourse of over a billion people isn’t always easy. There are ways around it, like in China some people simply hold up a blank piece of paper as a protest symbol, since that way it’s hard for Tencent’s software to detect any wrongdoing.

 

Inadvertently giving a voice to people to speak out.

 

In other words, Tencent was inadvertently giving a voice to people to speak out through its apps, and so perhaps the government began to see Tencent’s dominance as less of a good thing. But the other reason for all this is not so specifically about Tencent,

and more just that the CCP perhaps felt big tech, in general, had grown too powerful and the government needed even more control, and to remind everyone who is the real boss.

So basically, it seems China had achieved what they wanted by not having much regulation for years they’d allowed China's business to thrive, they’d got their surveillance tools like WeChat, and enabled China companies to invest internationally to give china some influence abroad. But now that they’d achieved what they set out to, it seems the CCP wanted to send a message that even the wealthiest and most influential.

China entrepreneurs and companies are not above the party or the law. Tencent perhaps grew too large for the China government and needed to be tamed. And of course, it should be pointed out that many of the new regulations and laws to prevent monopolies made sense - it only seemed extremely aggressive because for so long there’d been almost no regulation, and within a couple of years a lot changed.

But in the midst of all this, Pony began showing up for fewer and fewer public events, even missing his company's own annual party. And as Tencent’s valuation continued to fall, some began to question what was going to happen to Pony Ma and his business empire?

 

What the future may hold for Tencent.

 

let’s just quickly summarize where we’re up to, as we’ve covered a lot here, and I think we could all use a very quick recap. So, Tencent’s started out by copying chat software, and by tailoring it to the China market. They then turned it into more of a social media platform, just as the era of desktop computing was exploding.

Tencent’s then used its resources to jump on the wave of mobile internet growth and became an essential part of China people’s lives by creating WeChat for mobile. They then utilized the insane traffic they were getting from QQ and WeChat to diversify into other more lucrative opportunities like gaming and video. Tencent’s approach to rivals was to clone their product or service, and then drive vast amounts of traffic to it thanks to QQ and WeChat. If that didn’t work, they’d buy out the company instead, or buy a large stake in it. And Tencent’s continually kept reinvesting profits to either clone or buy other services, and often swallow them into WeChat. Eventually, Tencent’s had a whole ecosystem of influential companies.

But the reason they were able to often use anti-competitive tactics and expand so rapidly was because of ties to the China government, which used their apps for surveillance and censorship. This limited the appeal of Tencent’s apps outside of China, so they began investing in international companies instead, including many of the biggest game developers, and companies such as Reddit and Discord. Tencent became one of the largest companies on the planet, but once China began its crackdown on big tech companies to reign them in after they’d become so powerful, Tencent’s valuation began to fall.

Ok, so that’s where we’re at, but what next? Well, the cracks have definitely been showing for Tencent. There have already been layoffs over the last few years, and Pony recently blasted employees for being lazy, saying ‘You’re chilling on the weekends, playing ball’ and began demanding a lot more from his team in an uncharacteristically aggressive speech. But to be honest, Tencent should be fine. They are still an absolutely massive company worth hundreds of billions of dollars, with huge influence. The crackdown may have stunted their plans a little, but Tencent is still a very powerful company, WeChat still dominates the lives of people in China, and Tencent will continue investing in companies abroad.

Tencent’s even had some good news within China in September 2022 when for the first time in over 15 months it got its first new game license approved - a new mobile game called Health Defense. The game was about public health and had very clearly been produced to please the China government. And that is perhaps the one thing that will change; Tencent will have to be even more closely aligned with the CCP to ensure there are no further issues.

For example, Tencent was actually one of the major investors in the movie Top Gun Maverick - but they decided to pull out of the project over concerns that the themes of the film could anger the China government. Tencent has also partnered with the CCP’s propaganda department to help promote its worldview and socialist values. Like they released a game ‘clap for Xi JinPing’ a game where you literally just clap for the president to show your appreciation.

So basically, it seems clear that Tencent is trying harder than ever to stay in the China government’s good books - I mean, they don’t really have a choice. As for what’s next for Tencent though, that’s a question Pony is almost certainly thinking about often. He was early to catch the rise of desktop computing, and then early to double down on the rise of mobile internet as well.

So can Tencent catch the next wave, whatever that may be? For example, some believe the Metaverse could be a big part of our future, and Tencent’s arguably even better positioned than Meta for building the Metaverse given its dominance in gaming and virtual worlds. But then again, the CCP probably wouldn’t want a Metaverse that they couldn’t have a lot of oversight in so that probably limits Tencent’s chances of building a global Metaverse.

And thus the eternal struggle for Tencent to keep China and the rest of the world happy will continue. But what can’t be denied is that Tencent is ultimately an incredible business success story. Whilst this video has of course looked at some of the controversy surrounding Tencent, they’ve also done a lot of good too, and made some incredibly useful apps - so there is definitely

plenty of lessons to learn here. There is a quote that I like a lot which is ‘that you have to learn the rules of the game, and then you have to play better than anyone else’, and I think Tencent’s is a great example of that. They literally went from being a tiny company on the edge of bankruptcy to one of the world’s most valuable companies - and so I hope you’ve enjoyed this journey through Tencent’s history.